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HealthScare Stocks 2019: Dire Or Curable Diagnosis?

Health care sector stock performance has certainly been under the weather so far in 2019. After turning in the best performance of any S&P 500 sector in 2018, the health care sector has taken ill and not kept pace with the broader stock market’s sharp rebound this year.  Most of the recent pressure on health care stocks stems from increasing “Medicare for all” rhetoric by numerous campaigning Democratic presidential candidates.  It appears that many investors have extrapolated that phrase to mean widespread and direct involvement by the federal government in most, if not all, aspects of the health care industry.
You’re Likely Not Immune
If you’re an investor with a diversified portfolio of stocks, chances are that you own a healthy dose of health care stocks. In fact, the health care sector represents 15% of the S&P 500 index1 and there are many health care focused mutual funds and ETFs that have attracted investors given impressive performance over the long term.  As shown in the table below, over the past 10 years, the health care sector (HLTH) has been a top performer in the ongoing bull market. Importantly, the sector has held up relatively well versus other sectors during market downturns given its defensive characteristics (healthcare is mainly non-discretionary, we’re living longer etc.).

Source: S&P Dow Jones

Health Care: Ailing & Trailing In 2019
Thus far in 2019, the health care sector has been under the weather especially when compared to the strong year-to-date performance of the S&P 500.  As shown in the table below, the health care sector has trailed all sectors thus far in 2019 with a 3.6% return compared to the S&P 500’s 15.2% return2.

                                                                          Source: Koyfin

Medicare For All? It’s Complicated
I don’t normally mix politics and investing. However, given health care stocks’ reaction to Democratic presidential candidate rhetoric and the potential implication on future investment portfolios, I believe it’s important to weigh in.  So how real is the risk of “Medicare for all”?  First off, it’s important to define what that phrase really means. For some Democratic candidates it appears to mean a complete replacement of private insurance with a single Federal government payer. For other candidates, its seems more like somewhere in between with more government involvement especially with price controls.
As the chart below illustrates, while a strong majority (71%) of polled Americans in a Kaiser Family Foundation poll favor health insurance as a right, support for paying more taxes (37% in favor) and delays in getting needed medical attention (26% in favor) drops sharply to a much smaller level of support. Therefore, while most Americans want a fix for the current health care system, it appears that many also don’t want a lot more government control.  

Health Care Stock Pain: Chronic or Acute?
The next Presidential election is still well over a year away with much more rhetoric and debate about expanded health care likely.  However, if an investor believes that a complete sweep by the Democrats in the next election is likely which includes a Medicare for all president, it may make sense to reduce health care investments if it fits within one’s financial plan.
The Kaiser poll shown previously highlights that Americans want more fixes to the current health care system and not a complete government overhaul, in my view. Therefore, I believe the recent health care stock pain is more acute than chronic. Moreover, the fundamentals and outlook for the health care remain robust with numerous powerful growth tailwinds including living longer and increasing drug and device research and development spending.

Source:  Deloitte 2019 Global Health Care Outlook

“Patience & Fortitude Conquer All Things” – Ralph Waldo Emerson
So while there will likely be more volatility ahead prior to the next Presidential election, I believe the diagnosis for health care over the ensuing 18 months is more acute pain than chronic.  Over time, I believe the long-term prospects for health care remain solid, driven by an aging population with rising demand for health care devices and services along with exciting and needed innovation. Yes, TUMS and/or Dramamine may be appropriate at times to help stomach the rhetoric and volatility ahead, however patience and intestinal fortitude should prove effective remedies for successful health care investing over time.
David Hone, CFA
S&P Dow Jones
as of May 21, 2019